Huge bonuses paid to City workers have financed much of the recent property boom according to anecdotal evidence from the housing market. This extends far beyond London to areas where deal-weary stockbrokers and bankers buy weekend retreats.

In a crashing stock market bonuses may be cut, thwarting the ambitions of City workers who want to move up the property ladder. This could destabilise prices elsewhere in the market.

Experts are not too pessimistic yet about the effect of falling City pay packets on the wider economy but City workers might want to consider their prospects before planning a leap up the housing market.

Typically, City employees will get bonuses worth between 50% and 250% of their basic salary in a decent year, and would normally expect another large pay-out in February or March, but matters are rather more complicated at the moment since stock market volatility is threatening to push down the bonus levels in early 2003.

The level of the stock market has a significant role to play in bonus setting. Fund managers of unit and investment trusts are typically paid according to the performance they achieve in the fund and the amount of new investment they attract.

A successful manager might find that only 10% of a total remuneration worth £1m or £2m a year may be salary, with the rest from bonuses, pension payments and stock options.

There is a clear threat to bonus levels now that stock markets have fallen to the same value as six years ago. This feeds through to City workers who advise on mergers, acquisitions and flotations, where there is less to do when markets are low.

Many investment houses will try to protect the pay of top fund managers, particularly if they have kept losses on their investments smaller than those of rival firms. These managers are increasingly becoming iconic figures. Financial advisers often advise clients to switch their money out of a unit trust if a star manager leaves.

Jason Hollands of financial adviser Best Investment says: "Companies may feel they have to keep high salaries and bonus pay ments for star managers. It could be the other people in those companies who see their bonuses fall."

Stockbroking firms and other City institutions are secretive about bonuses. Merrill Lynch, which pays them every March, is typical in refusing to discuss the remuneration of its 5,500 staff in London.

Recruitment agencies, however, get a clear understanding of changing trends. It seems that while some parts of the City are suffering, others are holding up well.

Shelly Casley of the banking team at Parker Bridge Recruitment says: "Leading European stockbrokers in the City, the back office teams, received large bonuses in February and March 2001, typically 25% to 30% of salary.

"This year, the bonuses were much lower: 5% to 10% of salary, and some staff received no bonus at all.

"Next year is difficult to predict exactly but with the wobbly US economy having an impact, similar bonuses would not be a surprise for February/March 2003."

Paul Hunt of Healy Hunt, a firm which specialises in the debt and credit markets of corporate banking, is more optimistic: "When markets are looking a little bit shaky, credit and risk are disciplines which are very much in demand."

Many employers in this field are ready to give guaranteed bonuses of between 25% and 100% of salary. In the market for major business loans, however, Hunt believes bonuses could dip significantly because "there aren't a huge number of deals".

Bonuses are usually given in sectors where profits can fluctuate significantly from one year to the next. Like many in the City, leading directors of some high street store chains can earn more in bonuses than in basic pay. The John Lewis Partnership, which owns the Waitrose supermarkets, operates one of the country's largest bonus and share ownership schemes for its 56,000 employees.

Their bonuses have dipped in recent years, from 24% of basic pay in 1998 to 9% last spring.

Marketing director Mark Price says: "The bonus scheme is a very good motivator for people."

He does not believe morale is particularly low now: "We had been telling the partners [the employees] for a long time that bonuses would be deflated because of the investment programmes we have put in place."

Waitrose says it is far too early to predict the 2003 bonus level. In some City organisations, however, teams are already doing their sums. Bonuses usually take into account a company's overall performance, the work of teams within it and the efforts and success of each individual. The results can be extremely controversial, sometimes provoking legal disputes and employment tribunal hearings when discrimination is alleged.

Younger people without families or long at work may not mind much, but for older people it can be devastating to discover one morning in March that their total remuneration is to be halved. This can be particularly hard to take when they realise some of their colleagues' bonuses are being increased.

Living with the bonus has long been accepted as part of City life, however. Many firms and employees have worked hard to take some of the unpredictability out of the system. Companies give 'signing-on bonuses' to new staff and guarantee their future pay-outs.

It is not unheard of for younger people to mortgage themselves to the hilt and then, if they decide to change jobs, to choose the employer that offers the highest guarantees.

People changing jobs in the City at this time of year have to be good negotiators to get the best deal with their next employer. They will want to ensure that their next employer will promise them a decent bonus too, and will want offers of hard cash, a guaranteed bonus after six months, perhaps, as well as a signing on fee.

Hunt says: "People recognise that the financial markets are bonus-driven.

"Any reasonable employer thinking of taking someone on at this time of year will accept they will want compensation for the six months of accrued bonus that they are leaving behind."

"Who wants to buy these £1m playpens now?"

Many City workers are seeing their homes fall in value. Flats in the Barbican and other parts of the Square Mile dropped by 22% in the first three months of this year, according to the Land Registry.

Average prices were £217,000 in March - down from £278,000 at Christmas. "I can see prices at the top end - £1 million plus - coming down another 10% in the next couple of years," says John Wriglesworth of the Wriglesworth Consultancy.

"Who wants a penthouse flat by the river? These are not for families," he says. "These are for foreign dignitaries or fat cat traders who want playpens in the week. What has gone up excessively in price is coming down in price."

FPD Savills, the upmarket estate agents, confirms the volatility at the top end of the market. Prices in central London have risen by 4.5% in the past 12 months, according to its figures. This compares with a national figure of 21% recorded by the Nationwide building society.

Richard Donnell of Savills believes that buy-to-let landlords may be feeling the downturn more than owner-occupiers: "Rents have fallen 15% in the past nine months in London."

Foreign companies are sending fewer people abroad, so the central London rental market feels the impact more profoundly. About 80% of tenants in the central London are from overseas, compared with 40% of homebuyers, says Savills.

Alex Bannister of the Nationwide is keeping a "watchful eye" on central London prices but does not expect dramatic changes, nor any "trickle-down" effect if the top end of the market is slightly depressed.